retirement savings

It’s not a nudge when it comes from Washington.

Cass Sunstein had to be the happiest academic in America following President Obama’s recent State of the Union address. After all, in just four short years he got his analysis of how people need help making good choices—a nudge in the right direction he likes to call it—from manuscript to a brand new retirement savings vehicle. Of course, Sunstein took a break from academia to become Obama’s first regulations czar, so the president was already a fan of the Harvard Law professor. But still, having an idea that you and coauthor Richard Thaler describe in the 2009 book Nudge: Improving Decisions about Health, Wealth, and Happiness come out of the president’s mouth in the State of the Union is as big as it gets for any professional.

Too bad that’s about the most impressive thing about the new MyRAs.

“Let’s do more to help Americans save for retirement,” the president said. “Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k) s.” (This formulation comes almost wholesale from Chapter 6 of Nudge.)

The answer, according to Obama, is offering a savings vehicle called a MyRA, as in my retirement account, to individuals who earn up to $129,000 a year and couples who earn up to $191,000 a year. The program, like the name, is similar to a Roth IRA, which is funded with after-tax contributions and is tax-free when withdrawn at retirement. A MyRA is invested in Treasury bonds and backed by the federal government against losses. Initial contributions can be as low as $25 and additional contributions can be as little as $5. These starter retirement accounts can grow to a maximum balance of $15,000 before the money has to be rolled over into a private-sector Roth IRA. The account can move with the individual if he changes jobs since it is a private account belonging to the employee. The Treasury Department says MyRAs are “designed to help savers start on a path to long-term saving and serve as a stepping stone to the broader array of retirement products available in today’s marketplace.”

As Lydia DePillis wrote in the Washington Post, the MyRA is “basically the embodiment of . . . Sunstein’s ‘nudge’ philosophy, which pushes people by default into the choices that make most sense for them.” The technical term is “choice architecture,” which means that decisions are designed and limited in order to have individuals do something that is deemed ultimately good for them, even if they don’t realize it. In this case, as Sunstein and Obama both argue, saving for retirement is a good thing that more people should do but don’t. So here comes a government vehicle to get those who aren’t saving to start. And Sunstein believes that government should make its push to save for retirement even more aggressive by forcing workers to opt out rather than ask to set up an account and by having deposits made by automatic payroll deduction.

Richard Williams, the director of policy research at George Mason University’s Mercatus Center, disagrees that government “nudges” are in the individual’s best interest. Take buying a car, for example. As Williams explains,

the administration’s goal is energy efficiency. . . . That’s what the Corporate Average Fuel Economy (CAFE) standards, recently made stricter by the Obama administration, are all about. The assumption is that despite the recently increased price of gasoline, consumers are still too shortsighted to buy cars with better gas mileage, perhaps prioritizing other considerations such as cost or vehicle design. CAFE standards simply force the issue by making car companies produce more fuel-efficient fleets in the first place.

The possibility that individuals might prioritize something other than fuel efficiency is of no importance to the government because, as Williams concludes, “nudges are about achieving government goals, not personal goals.”

MyRAs fall into the same category when you understand that government goals are served when someone buys Treasury bonds, now that the Chinese aren’t anymore. As John Girouard wrote at Forbes, “the federal government is stuck with a lot of unpopular bonds, and one sure-fire way to get rid of them is to sell them to the American public as a retirement savings vehicle. It’s a wolf in sheep’s clothing.”

Perhaps the Obama administration is hoping that the MyRA will serve dual purposes, though. As Sunstein proposed, people will get into the habit of saving for retirement, which they should be doing anyway, and the government will get someone to buy its debt. But this is wrong on both counts.